A Beginner's Guide: How to Rent Your Ideas to Fortune 500 Companies (Plus: Video)

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I first met Stephen Key in 2001. Two months later, I used a few recommendations of his — shared over the customary gin tonic — to help a friend double overseas sales in less than two weeks in New Zealand and Australia.

How? Licensing. It can be a beautifully elegant model.

Stephen is somewhat famous in inventing circles for two reasons. First, he consistently earns millions of dollars licensing his ideas to companies like Disney, Nestle, and Coca-Cola. Second, he is fast. It seldom takes him more than three weeks to go from idea to a signed deal.

He is not high-tech. There are no multi-year product development cycles. He specializes is creating simple products or improving upon existing products, often using nothing more than a single-sided drawing or photograph. Coupled with refined cold-calling skills, Stephen meets with some of the most influential marketing executives in the world. In this interview, we’ll explore how this advisor to American Inventor rents his ideas to Fortune 500 companies.

1- What exactly is licensing, and why is it a good option for people with ideas but little time or patience?

I think licensing is a bit of mystery to many people. It really doesn’t have to be.

Licensing is renting your idea to a manufacturer. The manufacturer handles the marketing, manufacturing, distribution and basically everything else required to bring the product to market.

Usually quarterly (four times a year), the manufacturer pays you a royalty on every unit they sell. This royalty—generally a percentage of the total wholesale price—is your payment for bringing them a new product idea that they can sell to their customers.

It’s an attractive low-risk alternative to manufacturing products and taking them to market yourself.

Using licensing, I can spend my time coming up with new product ideas instead of worrying about balance sheets, cash flow, employees and all the other hassles of running a company. I might pitch three ideas one month and no ideas for the next two months. You can have total flexibility with your work schedule.

Here’s one tip on how to make sure you get paid a certain amount four times a year.

Minimum Guarantees - So here’s why I use the term “renting” when describing licensing your idea to a manufacturer. It’s very important to make sure the manufacturer performs. You need a performance clause in the licensing contract. Without a performance clause, the manufacturer could just sit on the idea and do nothing with it. I’ve seen it happen.

Ensure you have a “Minimum Guarantee” clause in the contract. A minimum guarantee clause basically says the manufacturer needs to perform and sell a specified number of units every quarter or every year. Otherwise, you get your idea back and you can license your idea to another manufacturer.

It isn’t usually necessary to call in [enforce] the minimum guarantee clause. Most of the time you want to give the manufacturer a chance to perform. After all, you are partnering with them and they’ve spent big money on setting up their facilities to manufacture your new product.

Here’s another tip: Don’t front load the deal. I see many people with ideas doing this. They ask for large up front fees and make it to hard for the manufacturer to say yes to the deal. Instead ask only a small amount of money up front and scale up the minimum guarantees each quarter.

An example of minimum guarantees:
100,000 units quarter one
200,000 units quarter two
300,000 units quarter three

Let’s say the manufacturer sells 110,000 units quarter one. You would get paid a royalty on each of the 110,000 units sold.

Then let’s say the manufacturer only sells 190,000 units quarter two. The manufacturer can choose to pay you the royalty for the minimum 200,000 units they guaranteed you they would sell and they would retain the rights to manufacture your idea.

You should be OK with these “Minimum Guarantee” numbers since you set them up when you negotiated the contract. Set up numbers you think the manufacture can meet and that you’ll be OK with if the manufacture just meets the agreed upon “Minimum Guarantee”.

Of course you would prefer to earn royalties on 600,000 units every quarter, but you know you are guaranteed at least a certain “Minimum Guarantee” every quarter. This makes it nice when budgeting to buy that new sports car you’ve had your eye on.

2- I’ve heard you say that the most important thing you can do when licensing an idea is to spend as little time and money on the project before you get feedback from a manufacturer. Why?

Yes, that’s true. Unfortunately, it’s the exact opposite of what most people do. Most people go out and spend $3k to $20k or more on a patent and a few grand or more on a prototype first.

Time is the enemy in this process.

I’ve talked to inventors who have been contemplating or working on ideas for years. That’s not me. When I have an idea, it only takes me three days to three weeks to find out if the idea has legs.

On average, I recommend that my students take no longer than three weeks to three months before they make the decision to keep working on the project or dump the idea and move onto the next one.

Spend very little time or money on a project before you get feedback from manufacturers. The reason for this is simple: You’re not going to hit every idea out of the ballpark. Sometimes the benefits of the idea just aren’t intriguing enough. Maybe the idea has some manufacturing problems. Maybe the idea has been tried before and you didn’t find it with your research. There can be many reasons why manufacturers decide not to move forward with an idea.

You need to call a handful of potential manufacturers that might sell your idea. It takes very little time and next to no money to make the calls, and it’s the only way you’ll get the critical early-stage feedback.

File a provisional patent application ($100), create your sell sheet ($0-$80) and start making phone calls as soon as possible. That’s totally the opposite of what most people do. Most people dream or plan and research the idea to death.

The reality is that you will never be as knowledgeable about a particular industry as a manufacturer that been in the business for thirty years. They’ve seen everything imaginable in their product area. Their opinion is the only one that matters. Get your idea in front of them as soon as possible and get the feedback you need to pursue it or kill it.

Here’s a summary of my solution to the patent and prototype hang ups many people seem to have.

PATENTS:

PROBLEM (What most people do):

The majority of people I talk to think the first thing they need to do is go out and spend money to have an expensive patent filled by a patent attorney. Here’s why that’s wrong: Many times you’re going to get complaints from manufacturers that your idea needs to be fixed in one way or another. No problem. You’re creative and they aren’t. Go back to the drawing board and fix the problems the manufacturer presented.

The only problem is that if you’ve wasted $3k to $20k on a patent, now your going to need to file another patent covering the new features of your product. Another $3-20k? I don’t think so. There is a better way.

SOLUTION (My method for you):

Instead, spend $100 on a Provisional Patent Application (PPA). A PPA gives you one year to fish of the end of the pier to see if anyone is interested in your idea.

A PPA also allows you to say “patent pending.” It’s a huge benefit to the small guy! If you come up with a new version of your invention, just file another PPA with the additional features. With my approach, you should be able to get a “go” or “no go” in three weeks to three months.

Make sure to put another one to five months aside for negotiations and you’ll still have many months left on your twelve month PPA.

Then when you license your idea to a manufacturer, you’ll put in the contract that the manufacturer is responsible for paying your attorney to upgrade your PPA to a full patent and put it in your name! This is how I get multiple patents, in my name, paid for by manufacturers.

PROTOTYPES

PROBLEM (What most people do):

People think you need to have a polished and perfect prototype in order to sell an idea. I have sold many ideas with very simple prototypes and many without prototypes at all .

What people don’t understand is that you are not selling your prototype or your patent. I’ll say that again. You’re not selling your prototype or patent. You are selling the benefits of your idea.

SOLUTION (My method for you):

Create a sell sheet. What the heck is a “sell sheet”? It’s a regular 8 ½” x 11” piece of paper. It’s like an ad for your idea. It has the big benefit of your product in one sentence at the top, maybe a few sub benefits or features in bullets below and a picture or drawing of your idea. “Oh, but I have to build a prototype,” many will say. No, you don’t.

You don’t need a prototype until you get some interest. If you don’t get any interest, you haven’t wasted time on a prototype.

Your sell sheet should be like a billboard on the freeway. People should be able to glance at it for a few seconds and understand the benefit of buying your invention. They don’t need to understand every feature or hear you make clichéd statements like, “if we only sell this to 1% of all households in the country, this new idea will make millions”.

My one line benefit statement for one of my biggest ideas was, “I have a new label innovation that ads 75% more space to your container.” That’s it. I didn’t need to explain how when I called on the phone, they just wanted to know more.

Benefits, benefits. That’s what you are selling. Not your patent or prototype.


Stephen in motion: Repurposing existing products in 5 minutes for a call sheet model or prototype…

[To be continued in Part II: negotiated royalty rates, who to call within companies, product idea criteria, what product categories to avoid, and more]

Posted on: November 26, 2007.

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403 comments on “A Beginner's Guide: How to Rent Your Ideas to Fortune 500 Companies (Plus: Video)

    • Troy,

      There is no legal requirement to file an LLC when you do a deal with a company. However, I’d highly recommend it.

      Many of my students wait to file the LLC until they are in the midst of their first deal.

      However, this is not legal advice. Please contact an attorney if you want a legal opinion.

      Like

      • Hi- I need to ask you a question!
        What are the disadvantages of licensing a new idea product to a larger company vs a smaller one?
        thank you very much for your time :)

        Like

  1. Thanks Kat, i really do appreciate your time and candid advice.

    Maybe I’m breaking my head for nothing trying to get this patent thing done. Who knows, maybe i might not need it as such. In fact, it is likely i might not need it in the long run. And my reason being that the area sales manager of the company i am talking to at the moment really does like my idea, in his words, he said, “if not for the bureaucracy of big organizations he would have ‘oked’ the idea himself and see how it goes”. I really can’t emphasize enough his cooperation. In fact, two weeks from now he has promised to personally approach R&D department to find out if they have anything lined up regarding my idea, since October was the beginning of the companies new financial year.

    I can only keep my fingers crossed and hope for something good. And I’ll also let you know how it all went. Thanks once again for your concern. And I’ll also find time to check out both kiva and kickstarter.

    Like

      • Dez, That’s a personal decision you need to make. I’d contact your legal advisor. I can tell you what i do. I file a PPA and just get the product in. Most companies won’t sign your NDA early on. Your PPA is your protection.

        Like

  2. how do you contact manufacturers or even know who they are? I’m a RN and also have MBA, I see products and have ideas that would help people all the time but I’m never certain the process. You have given me the process now I need phone numbers

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  3. Hi Stephen and Andrew,

    I am a little bit confused concerning licensing to multiply companies. If more than one company out of 100 will be interested in my product – should I choose better deal or it is legal to license the product to both of them in one country? How it works ?

    Thank you a lot for your advice and time

    Like

    • Olga,

      That’s a good problem to have. Yes it’s legal to license your idea to more than one company. However, it doesn’t make sense if they sell the exact same thing in the exact same stores. So it’s really about using common sense. And yes…. take the best deal if you have multiple offers.

      Like

  4. Hi,
    I have an idea I really like and that I would like to have licensed. But I don’t really know how to approach this. That 1-year PPA: Is it country-specific? I mean, when I have it licensed in Canada – can still someone in Europe come up with the same idea?
    Can I have it licensed in Canada even though I am not a Canadian citizen?
    And how to find an office that offers PPA?
    Thanks a lot,
    Caroline

    Like

    • Caroline, Google USPTO and you’ll find the patent office web site. You or anyone else in the world can file for a PPA (Provisional Patent Application). Now it’s only $65 if you earn under $150k a year. Patents only protect you in the countries in which you file them, however you may have some rights to later file internationally if you file a US PPA. This is not legal advice as I’m not a patent attorney, so please make sure to contact an attorney for legal advice.

      Like

  5. Greetings, I believe your blog could be having web
    browser compatibility issues. When I look at your site in Safari,
    it looks fine however when opening in Internet Explorer, it has some overlapping issues.
    I just wanted to provide you with a quick heads up!
    Other than that, excellent website!

    Like

  6. Hello, I am a product developer and have a product patent. How do I get a list of manufacturers. It is a product for vehicles, thats designed to save lives. Thanks.

    Like

    • Cassandra, Stephen and i have a list of 1,400 companies looking for ideas on our web site. Feel free to use it. Click on my name above to visit the inventRight web site and then look under the help menu. It’s free, but is not meant to be a go to list, but rather a supplement. You need to make your hit list from scratch. Look around where you want to sell. Then call the manufacturers selling there.

      Like

  7. Hi Andrew…great tips…what about an entrepreneur like me who has a unique gourmet pizza spice…Are the steps for licensing a food product like a spice blend similar? Thanks…Matt

    Like

    • Hello Matt, Kitchen and cooking are hot categories. It’s tough to get a patent on what would be essentially a combination of natural substances like spices, however if you had a processing method you might be able to get some protection on a method of manufacturing. The steps to license a food product would be the same as with any other product. FYI – I am not an attorney and this is not legal advice. Please contact an attorney if you are seeking legal advice.

      Like

      • Hi Andrew,

        is it possible to modify other manufacturers product already on the market? My idea is to have this 2 products manufactured as 1 product. this 2 products are sold separately but i haven’t seen them use together as this 2 are not design to use together. My idea is to make the first product similar but slightly different design and different colour to what is on the market or as much try to make it different looks but same function. The second product won’t look the same because of its size, weight and design. But will function or will produce the same benefit just like the 1 on the market. If this 2 products will combine as 1 product it will give a more better benefits when the 2 product join together. this product is very useful that the average use in our State is about 5600 pieces per week and is a single use only. in California alone approximately 30,000 per week. Hope you can give me more advice on how to look for a manufacturer or who are interested in modified ideas. I am not very interested in making this product my own as i don’t have resources, but royalty percentage would be very good for me as this product is very useful that i use them everyday at work. and this can be use not only in 1 country but the whole world. I’m sure its been using it but not with my modified idea.
        Thank you in advance and hope to here from you.

        Richard

        Like

      • Richard, a lot of products are created by mixing and matching two existing products into a new idea. You have to be careful that you aren’t using someone else’s technology that is patented. You can file a PPA combining what you are doing, but you might be patenting over someone, and you may possibly have to pay them to use their technology. You could license to them, but you wouldn’t be able to license to someone new without their approval. I’m not an attorney, and I’m not giving legal advice.

        This is a fairly technical question. If you have any others, please feel free to contact my business partner, Andrew Krauss, at 800-701-7993.

        Like

  8. Im looking to make some quick cash. I just want to sell my idea. I talked to a company and they are ready to sign contract for idea. I dont have money nor funds to create prototype. What can i do?

    Like

    • Michelle, that is fantastic news about the contract! If you don’t have the funds to build a prototype, you could ask the interested company to build one for you, but you will have to find someone to build a prototype. This is called proof of concept.

      Like

  9. Hi, I have an idea about tables for daycare centers that would help promote literacy with name and word labels in a way that does not interfere with table sanitation from the adhesives commonly used in labels. How do I know if there is a market for this? Where can I start that typeof research? All I know is that Daycare regulation agencies are now big on promoting literacy using word labels and all daycares have to comply. But how do I know if Daycare and school directors rather pay extra time to the staff to sanitize after removing labels or are they willing to invest in theses tables that would eliminate that sanitizing extra time? How do I know if there is a market to even start a prototype?

    Like

    • Mia, this is the first step in my program, and I practice what I teach! You have to study the marketplace. This will help you determine if there is a market for your idea. I would start with a sell sheet that shows the benefits of your idea, and show it to people in the industry. I’m not an attorney, and I’m not giving legal advice, but I would recommend filing a PPA to protect yourself.

      Like